Danish LTRO Stigma Takes Lead From Swedes Snubbing Aid

April 4 (Bloomberg) -- Denmark’s banks, struggling to
emerge from a funding crisis triggered by three failures last
year, are rejecting central bank cash to keep up with Swedish
rivals that have snubbed emergency liquidity.

Banks last week drew 18.9 billion kroner ($3.4 billion)
from Copenhagen-based Nationalbanken’s first offering of three-year loans at 0.7 percent interest. That was about a sixth the
amount estimated in a Bloomberg survey and less than the 146
billion kroner in state-backed debt lenders need to repay
through next year. Danske Bank A/S, Denmark’s biggest bank,
tapped 15 billion kroner “from a purely commercial point of
view,” it said on March 30.

“They’re extremely afraid of stigma, too afraid,” Thomas
Hovard, head of credit research at Danske Bank in Copenhagen,
said in a phone interview. “They have listened a bit too much
to the Swedish banks.”

Danish banks have paid more than their Scandinavian rivals
to borrow since last year’s failure of Amagerbanken A/S
triggered senior creditor losses. By contrast, Sweden’s banks
enjoy some of Europe’s lowest funding costs and have been vocal
in their rejection of emergency liquidity. Christian Clausen,
chief executive officer of Stockholm-based Nordea Bank AB, said
in March investors have rewarded his strategy of sticking with
market funding. That’s making life difficult for his Danish
counterparts.

‘Biggest Competition’

“The biggest competition for Danish banks is Swedish
banks,” Hovard said. “Swedish banks are in very good shape.
They don’t have their own liquidity facility so it’s in their
interest to state that it’s not a good idea.”

It costs more than double to insure against a failure of
Danske, using credit-default swaps, than it does of Nordea of
Sweden, the biggest Nordic bank. Swaps insuring Danske’s senior
unsecured debt for five years cost 295 basis points, versus
133.5 for Nordea, according to CMA. The spread widened to a
record 165 basis points on March 30, when Danske tapped the
central bank’s facility.

Sydbank A/S, Denmark’s third-largest listed lender, sold
its first senior bonds since 2010 in February, paying 200 basis
points more than the euro region’s interbank offered rate on 500
million euros ($667 million) of two-year notes. That followed a
sale by Danske in the same week of 1 billion euros in five-year
notes at 230 basis points more than the benchmark mid-swap rate.

By comparison, Nordea in January sold two-year floating-rate notes that were priced to yield 95 basis points more than
the benchmark euro interbank offered rate. Svenska Handelsbanken
AB, Sweden’s second-biggest bank, sold a five-year euro bond at
163 basis points more than mid-swaps in January.

‘Way of Thinking’

At Sydbank, using Nationalbanken’s facility doesn’t fit
“our way of thinking of how a bank should be funded,” Niels
Moellegaard, a spokesman for the bank, said in a phone
interview. Sydbank “actually doesn’t need the money,” he said.

Central bank Governor Nils Bernstein said last week he
welcomed banks using the three-year facility even if they don’t
need the support and instead take advantage of cheap loans to
boost their business. Denmark’s main bankers group agrees.

“The funding is so cheap, we shouldn’t be discussing
stigmatization,” Niels Stenbaek, chief economist at the Danish
Bankers Association, said by phone.

Denmark’s central bank will hold another offering of its
three-year loans in September. Banks can borrow at the benchmark
lending rate, at 0.7 percent since December, though the central
bank has said it may add a premium should financial market
conditions improve.

‘No Success Criteria’

“I still expect the funding markets to be working less
than perfectly, so a lot of banks will find the facility very
attractive” in September, Stenbaek said.

Denmark announced its three-year facility on Dec. 8, the
same day the European Central Bank said it would offer Europe’s
lenders longer-term loans. Since then, about 800 European banks
have tapped more than $1 trillion from the ECB, helping to prop
up sovereign-debt markets and ease the debt crisis.

Bernstein said there are “no success criteria” for the
facility. “The lending window will be open again on identical
conditions in September and the utilization of the facility
should be viewed as a whole,” he said in a statement after the
results were made public on March 30.

Danske Bank, whose use of the emergency loans accounted for
79 percent of the total, said today it is raising the rates it
charges clients by as much as 1 percentage point. The move will
help the bank better match borrowing costs to individual risk
profiles, spokesman Kenni Leth said by phone.

Stretching Maturities

Interbank spreads widened after the results were announced.
The difference between the Copenhagen interbank offered rate and
the equivalent eurozone rate was today quoted at 20.60 basis
points, the widest since January last year.

“I expect the facility to be used much more in
September,” Jan Kondrup, director of Denmark’s Association of
Local Banks, said in a phone interview. “The banks want to
stretch the maturity of the loans. Some of our banks will need
cash to refinance their government-guaranteed loans before they
expire in the first half of 2013.”

The association’s members hold 36 billion kroner of the 146
billion kroner in state-guaranteed debt maturing next year,
Kondrup said. According to Hovard at Danske, banks are cutting
themselves off from a credit lifeline that the industry needs.
That threatens to hurt the economy if lenders can’t provide
credit because they run out of cash, he said.

“They’re afraid of having to go to the market later with
this stamp, that they’ve used this facility,” Hovard said. “I
can’t understand it.”